Will there be peace?

Posted on June 26, 2017

Business world Introspective

It has been one month since President Rodrigo Duterte declared martial law in Mindanao following what he said was an act of rebellion by a group of Muslim extremists that had pledged allegiance to the Islamic State (ISIS). Fighting between government forces and the extremists has been intense but limited to the small city of Marawi where military bombings to flush out the terrorists holed up in buildings are continuing. So far, reports indicate that casualties include 268 terrorists, 65 government soldiers, and 26 civilians; as well as hundreds of thousands of mostly Muslim residents driven out of their homes, with tens of thousands living in cramped refugee centers in nearby towns which in turn, has led to sickness and reports of deaths.

With government forces claiming control of over 90% of the city, there is talk that the fighting will end soon, perhaps as early as Monday which marks the end of the Muslim holy month of Ramadan. Should that target be missed, speculations are that the President would at least want to end the siege and proclaim victory before his State of the Nation Address in late July. Too, there is a 60-day deadline for martial law counting from the eve of May 23, which may only be extended by Congress.

While an end to the fighting and the refugee crisis would be a most welcomed development, there is nevertheless a gnawing fear among Muslims, remembering similar fierce government assaults against their communities in the past, that the end would come at too high a price -- the loss of more lives, with many civilians still trapped inside the city, some taken as hostages, and a flattened city, home to a predominantly Muslim population. The fear is that such an event will give rise to resentments that would breed more extremism over time especially among the more militant young, a case of government winning a battle but losing the war.

For now, despite the grief over Marawi, the Muslim leadership and communities are seemingly cutting the President a lot of slack, appearing to recognize the dangers of allowing ISIS ideology to take root in the country. There is apparently enough trust in the President, a fellow Mindanaoan, who from the start had professed understanding of the deep-seated nature of the country’s Muslim separatist movement and promised to give them autonomy through a federal form of government, a promise that unfortunately, is proving much harder to deliver on. Hence, the President is now talking of signing a new version of the Bangsamoro Basic Law (BBL), a proposed legislation crafted under the previous administration to create a new autonomous region in Mindanao that the previous Congress failed to pass.

The key question is, will the Marawi crisis provide impetus to hasten BBL and bring lasting peace to Mindanao or will it just feed unrest that will radicalize the major separatist groups (MILF, MNLF) that government is negotiating peace with?

The answer, it seems, depends on the President’s next moves.

With P10 billion in rehabilitation funds, will he be able to quickly and effectively rebuild Marawi, overcoming bureaucratic constraints that have left Leyte still in shambles nearly four years after typhoon Yolanda/Haiyan made landfall? And will the President be able to focus attention away from drug addicts and communist insurgents to the peace process?

Peace is a necessary condition for unlocking Mindanao’s vast potentials. The island is rich in natural resources, its climate condition is conducive to agriculture, and historical and cultural ties will allow it to forge closer economic linkages with neighboring ASEAN communities in line with the aspirations of the ASEAN Economic Community. Can the President from Mindanao rise to the occasion?

(This article features excerpts from a post for GlobalSource Partners written by Christine Tang and the columnist.)

Romeo L. Bernardo served as Finance undersecretary during Corazon Aquino and Fidel Ramos administrations. He is a board director of Institute for Development and Econometric Analysis.

Corporate governance in the Digital Age

Posted on June 12, 2017

Business World Introspective  

Romeo L. Bernardo

Thursday, June 8.

As I write this column, the dust has yet to fully settle on perhaps the most challenging 24-hour day for the management of the Bank of Philippine Islands (BPI) in its over 165 years of existence. I hope to write a future column on lessons from this when all is done.

Still, it is not too early to congratulate its management and staff for how they have pulled together to resolve this in record time. And preserve the trust and confidence of its stakeholders, most importantly depositors and the regulators.

In today’s digital age where data information base and service delivery are predominantly electronic, banks and similar institutions and their regulators should assume that debilitating computer system glitches, cyber attacks, and natural disasters will happen.

We thus need to ensure we have robust IT systems and take all protective and preemptive measures including a providing for redundancy and quick recovery.

Equally important in this age of social media and instant connectivity is keeping stakeholders informed on a round the clock basis using all forms of communication. (And protecting them from predators; an SMS received -- “Does BPI have a branch in Lagos?”)

And not the least, a crisis management structure and plan that can be triggered swiftly.

“Any system in which humans are involved will at some point be disrupted by human error. Organizations distinguish themselves not by stamping out the possibility of error, but by handling the inevitable mistake well.” (As quoted in my Foundation for Economic Freedom Viber group.)

At this time, I will just note that BPI President Cezar Consing at the first hour yesterday reached out to the leadership of the Bangko Sentral ng Pilipinas (BSP) and the public. Both he and Acting Governor [Nestor] Espenilla sought to assure via early morning television interviews that this was: 1) a computer glitch and no hacking was involved; 2) being addressed and that the system should be back up within the day; and 3) that no one will lose money.

There were subsequent round the clock updates ending in one late last night, in both traditional and social media, that the problem was fully addressed and all electronic channels will soon be accessible. (And apologizing once again for the inconvenience and thanking clients for their patience.).

I dare say, BPI is passing the test. Though I should quickly add that I am an independent director at the Board, and unashamedly have my biases.

As I am along this road, you will forgive me for flying the colors some more by excerpting remarks at a forum on corporate governance last month organized by the BSP and the International Finance Corp. I will make the self serving assumption that BSP asked BPI to precisely present because we are among the best pupils in class. (For my full presentation, please refer to my blog entry, which can be read by visiting this link http://bit.ly/RBblogentry.)

1. We join the applause of the financial community and the broader Filipino public, on the recognition of a job superbly done by Governor Say [Amando M. Tetangco, Jr.] And the jubilation on the appointment of Deputy Governor Nesting [Nestor A. Espenilla, Jr.] a vote for continuity and an affirmation of the quality of monetary policy and banking supervision of the BSP and all its dedicated men and women over the years.

2. At BPI, when we speak of “corporate governance,” we go beyond the formal rules that sets out the Board’s oversight and its policy setting responsibilities. For us, it is all about imbibing and nurturing a culture of integrity, fairness, accountability and transparency cascaded from the Board, its management, and to all our employees.

3. In line with this, the Board ensures, first and foremost, that BPI’s corporate governance practices are consistent with the guidance of the BSP, Securities and Exchange Commission, and the Philippine Stock Exchange in strengthening corporate governance. And in October 2016, BPI was recognized as one of the awardees of the inaugural Institutional Investors’ Award for Corporate Governance.

4. We recognize that good corporate governance is ultimately, the responsibility of the Board. As is often rightly said: “Companies do not fail, boards do,” an observation I may have first heard from SEC Chair Herbosa.

5. The presence of Independent Directors on the Board helps ensure the exercise of impartial judgment on corporate affairs and proper oversight of managerial performance, related party transactions, and potential conflicts of interest.

Today, in our 2017 Board, seven (7) out of 15 directors are classified as independent, exceeding the minimum regulatory requirement to have at least 20% of board membership and the recommendation for publicly listed companies to have at least 33%.

6. We bank with all of the country’s major conglomerates and while Ayala is the bank’s single largest shareholder, they are not our largest client. There are a number of conglomerates with whom we have more substantial dealings.

7. The Nomination Committee ensures that there is diversity in the board -- in terms of gender, age, cultural background, education, professional experience, skills, knowledge, length of service. Our 2017 board is made up of three former bank presidents, a former member of the Monetary Board, a former assistant governor of the BSP, the representative of the Roman Catholic Archdiocese of Manila, a top regional officer of a global IT company, a retired founder/CEO of a top securities brokerage firm, a top CFO of major Philippine corporations, a topnotch corporate lawyer and a former Finance undersecretary, to name a few.

8. Equally important in our diversity policy is the representation of women. To date, we have four women directors, comprising 27% of our board membership, the highest among our peer banks. In 2016, we had 5 women directors. (In our management of 3000 plus managers, 67% are women.)

9. We take risk management and internal audit and control very seriously. Indeed as Governor Tetangco said in his keynote remarks, risk management is at the heart of corporate governance of a bank. Both our risk management committee and our audit committee are chaired by independent directors who have had distinguished banking careers culminating in being CEO’s in their respective banks.

10. The Board and its committees are regularly and actively involved in providing strategic guidance, risk appetite and risk metrics (operational, market, liquidity, regulatory, reputational, etc.) regular audits, capital adequacy reviews as well as oversight over pressing and urgent “issues of the day,” e.g., anti-money laundering, IT, cyber risk, consumer protection, etc.

11. In all cases, the oversight by the Board go well beyond the letter of the regulations in order to uphold depositors’ and other stakeholders’ interests, and protect the Bank’s reputation. Just to cite an example for our zero-tolerance policy for fraud and financial crime, whether external or in-house. Recently, we worked with government agencies in the first successful prosecution of international criminals involved in ATM skimming and card fraud. We do this beyond the value of the losses of the bank from specific instances, as a matter of principle and for deterrence.

12. Another example of this high level of diligence and risk management mind-set that has saved the bank from losses, where others have been blindsided. It is a matter of record at the BSP that in the global financial crisis a decade ago, BPI was the only big local bank that had zero holdings of international subprime securities. A quote from that period from a key board director on a proposal to purchase Lehman securities -- “I don’t care if it is triple A rated, if we don’t understand it, we are not buying it.”

13. The Bank has a Code of Conduct derived from the BPI Credo and Core Values. These are aligned with key global initiatives that promote responsible business practices. We have detailed rules on conflict of interest, insider trading whistle-blower policy, and related party transactions. (We were among the first banks to set up a related-party transactions committee, before a formal circular by BSP on it was issued.) While these codes are important, what is critical are internalizing these as values and culture.

14. I view my presence as a presentor here as BSP’s recognition of BPI’s efforts in promoting effective corporate governance. The high quality and professionalism of management and staff and the corporate culture that has been nurtured through the decades make the job of the Board members relatively easy.

15. As observed by the previous speaker from IFC, good corporate governance also provide bottom line yields. For BPI, it has contributed to a price to book valuation and an ROE that has consistently led the industry.

16. Finally, thank you to the BSP and SEC for all the work and effort done to build world-class financial institutions capable of meeting the challenges posed by the other FI’s in the region. We at BPI will continue our governance commitment for the long haul.

Romeo L. Bernardo is a board director of the Institute for Development and Econometric Analysis. He was undersecretary of Finance during Corazon Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com

CG Practices of BPI: Ceremonial MOU Signing and Mini Forum on Enhancing Environmental and Social Governance (ESG) and Corporate Governance (CG) Practices in Philippine Banks

May 26,2017

Narra Room 19 floor Multi-Storey Building BSP Mabini st. Malate Manila

Remarks of Romeo Bernardo

Opening:

Governor Tetangco,  Deputy Governor and Governor designate Espenilla, SEC Chair Herbosa,  IFC Country Director Ms Yuan Xu,  World Bank Economist Ms. Birgit Hans, dear Officers and staff of the BSP, SEC, World Bank, fellow workers in the financial community, friends:

The Board and Management of BPI thank the BSP for inviting us to this forum and giving this opportunity to share what we are doing in this field.

  Allow me first of all to join the applause of the financial community, and the broader Filipino public, on the recognition of a job superbly done by Governor Say. And the jubilation on the appointment of Deputy Governor Nesting; a vote for continuity and  affirmation of the quality of monetary policy and banking supervision of the BSP  and all its dedicated men and women over the years.

	Slide No.
1.      BPIs CG PRACTICES Let me start by saying that at BPI, when we speak of “corporate governance”, we go beyond the formal rules that sets out the Board’s oversight and its policy setting responsibilities. For us, it is all about imbibing and nurturing a culture of integrity, fairness, accountability and transparency cascaded from the Board, its management, and  to all our employees. It sets the standards on how we as a Bank, deal with various interests of, and relationships with all our stakeholders.	2
In line with this, the Board ensures, first and foremost, that BPI’s corporate governance practices are consistent with the BSP, SEC and PSE guidance in strengthening Corporate Governance as a financial institution with fiduciary responsibilities  and as a publicly listed company, including the best practices espoused by the ASEAN CG Scorecard. And in October 2016, BPI was recognized as one of the awardees of the inaugural Institutional Investors’ Award for Corporate Governance.  The award is given by Institutional Investors to listed companies based largely on their ASEAN CG Scorecard rating.	4
a.      Board of Directors We recognize that good corporate governance is ultimately, the responsibility of the Board. It is thus incumbent upon us directors, to step up and recognize our accountability to our shareholders and stakeholders.  As is often rightly said, “Companies do not fail, boards do", an observation I may have first heard from Chair Herbosa.	5
Board Composition. What drives the structure of our Board of Directors? We look at factors that influence stewardship such as board composition.  We ensure that the Board is composed of directors who individually and collectively have knowledge, expertise and  experience relevant to our industry and can drive our strategy moving forward. For this reason, board membership is also reinvigorated regularly. We saw the election of new directors in the past years, most recently in 2017. Our board is made up of fifteen directors, of which fourteen are Non-Executive Directors who are not part of the day-to-day management of the Bank.  Our only Executive Director is the President and Chief Executive Officer. With a board composed almost entirely of Non-Executive Directors, there is better assurance that interests of all shareholders are protected and that no director or small group of directors, can dominate the decision-making process.	6
Independence. The presence of Independent Directors on the Board, helps ensure the exercise of impartial judgment on corporate affairs and proper oversight of managerial performance, related party transactions and potential conflicts of interest. Today, in our 2017 Board, seven (7) out of 15 directors are classified as independent, exceeding the minimum regulatory requirement to have at least 20% of board membership and the recommendation for publicly-listed companies to have at least 33% but not less than three independent directors  on its board. The independence of our Board and its adherence to the principle of fair dealing is clearly manifested in the conduct of our business relationships with our many depositors and retail customers as well as  our corporate customers.  We bank all of the country’s major conglomerates and while Ayala is the bank’s single largest shareholder, they are not our largest client. There are a number of conglomerates with whom we have more substantial dealings.	7
Diversity. The Nomination Committee likewise ensures   that there is diversity in the board—in terms of gender, age, cultural background, education, professional experience, skills, knowledge, length of service.  Our 2017 board is made up of three former bank presidents, a former member of the Monetary Board, a former Assistant Governor of the BSP, the representative of the Roman Catholic Archdiocese of Manila, a top regional officer of a global IT company, a retired founder/CEO of a top securities brokerage firm, and a former Finance Undersecretary, to name a few.  Our directors hold academic degrees from here and abroad, and specialized training straddling various fields -- finance, accounting, economics, law, business management, international relations, political science, engineering and yes, banking. Equally important in our diversity policy is the representation of women. To date, we have four women directors, comprising 27% of our board membership, the highest among our peer banks, if I recall right. In fact, in 2016, we had 5 women directors. Gender diversity is even more pronounced in the Bank’s management where currently, we have 3,000 plus women officers, make up an impressive 67% of the total number of bank officers.		8
Board Committees. To heighten the efficiency of board operations, the Bank also established committees that assist in exercising board authority for oversight of internal control, risk management, and performance monitoring of the Bank. The committees afford the Board organized and focused means for the directors to achieve specific goals and address issues. The Board  currently has eight (8) committees. These are: the Executive, Audit, Risk Management Corporate Governance, Related Party Transactions, Nomination, Personnel and Compensation, and Retirement/Pension Committees. We take risk management and internal audit and control very seriously. Indeed as Governor Tetangco said in his keynote remarks, risk management is at the heart of corporate governance of a bank.  Both our risk management committee and our audit committee are chaired by independent directors who have had distinguished banking careers culminating in being CEO’s  in their respective banks. The Board and its committees are regularly and actively involved in providing strategic guidance, risk appetite and risk metrics,  capital adequacy reviews as well as oversight over pressing and urgent “issues of the day”, e.g., anti-money laundering, cyber risk, consumer protection, etc. In all cases, the oversight by the Board go well beyond the letter of the regulations in order to uphold depositors' and other  stakeholders’  interests, and  protect the Bank’s reputation. Just to cite an example: our zero-tolerance policy for fraud and financial crime, whether external or in-house. Recently, we have worked with government agencies in the prosecution of criminals involved in cybercrime such as ATM skimming and card fraud. And have invested much resources not only in their prevention, but in persecuting fraud of all types. We do this beyond the value of the losses of the bank from specific instances, as a matter of principle and for deterrence. Another example of this high level of diligence and  risk management mindset  that has saved the bank from losses, where others have been blindsided.  It is a matter of record at  the BSP that in  the global financial crisis a decade ago,  BPI was  the only big local bank that had zero holdings of  international subprime securities.  A quote from that period from a key board director on a proposal to purchase Lehman securities -- " I don't care if it is triple A rated, if we don't understand it, we are not buying it."	9
Induction and Director Education. The Board, through the Corporate Governance Committee, works to create numerous opportunities for directors to update and refresh their knowledge and enable them to fulfill their roles as members of the Board and its Committees.   These opportunities include internal meetings with senior executives and operational or functional heads and dedicated briefings on specific areas of responsibility within the business group. We consider the annual training mandated by the the SEC as genuine learning opportunities to deepen knowledge on various aspects of corporate governance such enterprise risk management and global best practices. These are conducted together with other companies of the Ayala group to promote constructive exchange across industries, and taps local and international experts in the relevant field.	10
Performance Evaluation. The Bank also measures the performance of the Board on the basis of what it delivers and how it delivers, how it meets its responsibilities to all BPI stakeholders, and how it addresses issues that impact the Board’s ability to effectively fulfill its fiduciary duties. Under the guidance of the Corporate Governance Committee, the Board conducts the annual self- assessment to ascertain the alignment of leadership fundamentals and issues, and validate the Board’s appreciation of its roles and responsibilities in the context of the operations of BPI and its subsidiaries and affiliates. Our self-assessment uses a 360-degree feedback report, which is a widely advocated, standard evaluation method of self-assessment and feedback review. These are survey forms where we rate our past year performance at four levels: (1) the Board as a body; (2) as Committees, and; (3) as individual directors. The fourth (4) is an assessment of the President and CEO, by the Board. Key evaluation criteria used are based on the respective Board or Committee Charter and duties and responsibilities of directors and of the President and CEO	11
Succession Planning and Talent Management.  Our Board understands that the Bank must continually evolve, adapt, and even restructure the business to remain ahead of such strategic, market, technology and regulatory shifts. And so, the Board, through its Personnel and Compensation Committee (Percom), manages the talent pipeline and assembles the required personnel with competence and qualifications capable of navigating such changes. Taking guidance from the Percom, the Bank instituted a program by which promotions to the SVP and VP ranks are vetted by a collective vote of a senior management committee whose membership varies from year-to-year.	12
Group Oversight. Relatedly, considering the Bank’s role in the BPI group as parent and publicly listed company, the Board of directors also ensures that BPI management maintains an effective, high-level risk management and oversight process across other companies in the group. We balance our oversight responsibility with the independence required by our subsidiaries in managing their specific businesses. This is most evident in the spin-off of our asset management business to the stand-alone Trust company in February this year. While it is a wholly-owned subsidiary, we place greatest importance on the conduct of its fiduciary responsibilities and the maintenance of its arms-length dealings with the Bank.	13
b.      Code of Business Conduct and Ethics.  The Bank’s has a Code of Conduct and its standards of behavior are derived from the BPI Credo and Core Values. These are  aligned with key global initiatives that promote responsible business practices. We have detailed rules on conflict of interest, insider trading whistleblower policy, and related party transactions.  As mentioned earlier, while this codes are important, what is critical are internalizing these as  values and culture. And  the  example set by the Board and management. A few words on Related Party Transactions. BPI has a Related Party Transactions Policy which guards against internal conflicts of interest between the company and/or its group and their directors, officers and significant shareholders and ensures that transactions are made in the normal course of banking activities with terms and conditions that are generally comparable to those offered to non-related parties or to similar transactions in the market. The Bank has established in April 2014 the board-level Related Party Transactions Committee to provide guidance and vet  related party transactions of significant amounts. BPI was one of the first banks that created an RPT committee to ensure compliance with the related party circular of the BSP prior to its release in 2015. Finally, let me talk briefly about Sustainable Energy Finance, the other topic for this afternoon's mini forum sponsored by the IFC. BPI through the sustainable energy finance program ( a partnership with IFC) is a pioneer mover in this space. BPI SEF started in 2008 and has been a leader in SEF with the largest market share. We have funded 260 projects in energy efficiency, renewable energy and climate resilience reaching an accumulated portfolio of P 35 billion to date.	14
CLOSING STATEMENT I view my presence here today as the BSP’s recognition of BPI’s efforts in promoting effective corporate governance. The high quality of management and staff and the corporate governance culture that has been nurtured through the years in BPI make it easy for the Board, including this independent director,  to perform its oversight responsibilities.  Finally, allow  me to thank the BSP and SEC for all the work and effort done to build world-class financial institutions capable of meeting the challenges posed by the other FI’s in the region. We at BPI will continue our governance commitment for the long haul, and strive to  be a leading provider of financial services and a most trusted advisor to our clients, colleagues, business partners and other stakeholders.  (And yes, as observed by the previous speaker from IFC, good corporate governance also provide bottom line yields. For BPI, it has contributed to a price to book valuation and an ROE that has  consistently led the industry.)    Thank you and good day!

Remarks of Romeo Bernardo during the Launch of the Book “Unintended Consequences: The Folly of Uncritical Thinking”

May 10,2017

Thank you for the invitation President Gilbert. I am most honoured
and delighted  to be here;  it is good to be back.   I was a PIDS Trustee for
over a decade, and grateful for the learning and the opportunity to be part of an institution that, thanks to the leadership of its Chairmen, Presidents,
Boards and Fellows ( many of whom are here ), abundantly   fulfilled the vision set out for it by its founding father-Dr Gerry Sicat.

It has won the respect of its various publics, government, both executive and legislative, academe, international research organizations and received international recognition for being at the top of its field globally.

When I was at the Board, my constant comment was that PIDS studies
are   "flowers in the desert" if not given enough visibility to policy
makers and the broader public.

In a column I wrote upon my "graduation" from PIDS, I quoted what author James McGann said about think tanks.

 "Think tanks seek to bridge the gap between knowledge and power".

The role of think tanks is to link the two roles, that of policy maker and academic, by conducting in depth analysis of certain issues and presenting the research in easy to read condensed form for policy makers to absorb.

Much has been done over the years, especially recently  to make PIDS researches more accessible to its various  publics- via  Press releases,  Policy Notes, symposium, attendance as resource persons in congress meetings,  use of electronic media ( some of which   may have been prompted by my suggestions ).

This book with such inspired, thoughtful and provocative title is a
landmark in this effort of reaching out. A big congratulations to the three editors and the various contributors, and all the people involved not just in its production, but all the researches that were done over the years that support the ten case studies covered.  It is just the tip of the treasure trove of researches over the years, over a thousand if I recall right, that cover a wide span of subjects. 

The ten chapters of the book itself have a wide coverage. Ranging from daily issues such as food, housing rent,  small scale enterprises and environmental concerns like overfishing and logging, to contentious subjects such as sexuality education, min wages, cash transfer and temporary employment-- issues that impact on the lives of the marginalized. And which unite the ten cases, and us here who support PIDS cause.

It is particularly timely. I would like to associate myself with what Professor Manny Esguerra said in his commentary.  I can't say it any better. And I quote--"More than a compendium of case studies, it is a plea for greater circumspection among those who are responsible for crafting, proposing, or approving laws, regulations and special programs in the pursuit of some noble social objectives. The book is a timely antidote to the creeping anti-intellectualism in our midst that favors a style of decision making based on bravado or strongly held priors without the benefit of evidence and rigorous study. "

One can readily point to current  initiatives in Congress and the executive that amply illustrate this--- Free irrigation, free tuition fee in State Universities and Colleges, raising SSS benefits without matching adjustments in contribution rates, Federalism as a cure all ( well captured in the title of an Ayala UPSE forum-- IF Federalism is the answer, what is the question? )

Thankfully, PIDS Fellows and others have weighed in on these very issues, and hopefully,these unstudied initiatives  do need not provide material too soon for case studies for a future edition of this book. 

 This book is a superb contribution to educating policy makers and students of every age.   Layman enough for a serious reader to understand, but does not compromise rigor by being simplistic or disregarding contrary evidence, even if it risks complicating.  It is honest. (I refer for example to the case study on minimum wages. ) 

  It is also relevant especially now that the new administration is putting more efforts in reforming/improving old policies and crafting new ones.

I would like to congratulate, I hope not too prematurely, very recent success in making "power listen to knowledge" an advocacy of major impact on welfare that goes back forty years ago academic work of Dr. Mahar Mangahas who is here with us today.

I refer to the decision to allow importation of rice by the private sector, which one hopes is a prelude to full reform of rice policy, an advocacy of PIDS and its
leaders/researchers over the decades.

On this subject, I have often asked myself about the pernicious durability of
bad policies. NFA rice policy is a classic example  on something that has been studied deeply and well for so long , and yet it persists? Why?

A chapter talks  about the possible reasons for this-  "policy makers often are blinded by factors such as biases due to ingrained values and beliefs, lack of critical thinking and open-mindedness, failure to think independently, political pressures arising from pursuit of narrow self interests that are inconsistent with the public good".  

I fully understand that as social scientists,  we refrain from normative judgements that can cloud analytical thinking.  Perhaps we leave to others, columnists or people like those in the Foundation for Economic Freedom  to translate "pursuit of narrow self interest" into more direct language that can pressure those  responsible for  immiserizing the Filipino poor.  I wonder if a quantification of the thievery, perhaps using forensics in addition to  economic impact analysis,  can drive home this point to a leadership and people that are sensitive to corruption issues.

 Other examples, why did it take so long to realize how costly and  damaging truck ban  is to the economy?  Surely  there other interests driving this beyond desire to relieve traffic ( money or power plays ?  ) Is the anti contractualization initiative meant to benefit workers? Or are the unions and their leadership trying to expand membership and dues? 

But for now,  let us not lose track of successes by PIDS and likeminded workers  in moving policy in the right direction by speaking truth-- rigorous evidence based analysis-- to power.   

For example, the EVAT reform, RH bill,  import and Forex and financial  liberalization, health care reform, conditional cash transfer expansion, just to name a few.

 I look forward to reading subsequent editions on these subjects --which could also be on "Intended Consequences".

 To inform not just the current crop of policy makers, but as it does, the young who even more so than our generation are bombarded by fake news or what poses as analysis  in 144 characters or less,  and quick fix solutions  that favor action without thought. 

 Again, a warm congratulations to the leadership and the fellows and staff of PIDS that made this book a reality, downloadable for free and now in hard copy.   

Mabuhay! 

Inflation risk from rice policy?

Posted on May 08, 2017

Business World Introspective Romeo L. Bernardo

I am pleased to share an economic brief my colleague, Christine Tang and I wrote for GlobalSource Partners (globalsourcepartners.com) a month ago.

The Secretary of Finance and the Bangko Sentral ng Pilipinas have likewise weighed in on the issue, stressing the importance of timely rice importation for price stability and supporting the call for liberalizing rice trade by many think tanks, including the Foundation for Economic Freedom (FEF) and the Philippine Institute for Development Studies.

To read the statement of the FEF, please visit the link http://bit.ly/FEFFB.

To read the PIDS Policy Note, “Quantitative restriction on rice imports: Issues and alternatives,” please visit the link http://bit.ly/PIDSQR or use a smartphone to scan the QR code.

This overdue reform measure will not only help stabilize prices, but also reduce poverty, wage uncompetitiveness, and relieve the public of wasteful government interventions.

In a column last Saturday, Dr. Mahar Mangahas observed that poverty indicators have bumped up notably recently, reversing a favorable trend. “Personally, I think the culprit is the rise in annual inflation to 3%, from only 1.5% the previous two years.”

He further noted that the simplest and quickest way to bring down the cost of food and hunger is to end the legal monopoly of the National Food Authority on foreign trade in rice and corn. We agree. Here is our April 12 brief.

“Many economic watchers have raised concerns about recent increases in consumer prices. From below 2% in the 16 months to August 2016, the headline inflation rate climbed past 3% in February and March 2017, with the BSP expecting the uptrend to continue through 3Q17 when inflation is forecast to be ‘very close’ to the upper end of the 2-4% target band. Despite what seems like a rapid rise, inflation outturns, traced in part to price pressures from rising international crude oil and a weaker peso, are in line with our own expectations of the inflation path... so far.

An emergent risk that could “shock” inflation forecasts is government’s rice policy.

Last week, the President curiously and unceremoniously fired the undersecretary of one of his most trusted aides, Cabinet Secretary and Chair of the NFA Council, Leoncio Evasco, for supposedly insisting on importing rice. Without it seems consulting Secretary Evasco, the President announced during a harvest festival the dismissal of the deputy, adding that the National Food Authority (NFA) should buy from local farmers rather than import rice to build up buffer stocks.

Under the law, the NFA, which has a mandate to stabilize food prices to benefit consumers while supporting farm prices to benefit rice farmers (effectively to “buy high and sell low”), is required to hold 15 days’ worth of rice stocks at any time and 30 days’ worth during the lean months of July to September. It also has the exclusive right to import rice and the prerogative to allocate import quotas to private traders. Rice continues to be protected by quantitative import restrictions (QRs) under a waiver secured from the World Trade Organization (WTO) in 2014, a special treatment that is set to expire in June 2017.

The President’s stance created a fair amount of confusion and news reports following the announcement revealed a brewing struggle within the NFA. Apparently, the dismissed undersecretary was merely trying to implement an order of the NFA Council, the inter-agency governing body of the NFA, to allow private traders to import rice, an order that the NFA administrator reportedly refused to carry out. Apparently too, the issue is not whether to import or not; the NFA’s rice stocks as of March were equivalent to about 12 days’ worth of consumption and it would need imported stocks to meet the higher required buffer for the lean season. Rather, the issue appears to be whether the importation should be done by the NFA, favored by the NFA administrator, or by private traders, favored by the NFA Council.

The struggle that led to the President insisting on the NFA buying local rice risks the country’s rice stocks falling further (especially if domestic farm outputs fall short of expectations) and thus, domestic rice prices spiking. Rice accounts for close to 9% of the CPI basket and given the projected inflation path, double-digit increases during the lean months would push the headline inflation rate well over the upper end of the BSP’s inflation target band.

Two recent episodes of surges in rice prices are instructive. The more dramatic crisis in 2008 saw rice prices, as captured in the CPI basket, rising from over 10% in March to over 50% by July causing headline inflation to surge past 10% from June to October, with rice contributing as much as 4.7ppt to the headline rate. A milder episode happened in 2013-2014 when rice price inflation increased from 10% in January to over 14% in June 2014, adding over 1ppt to headline inflation throughout most of the year. The former was associated with very low NFA buffer stocks sustained over most of the previous year through 1Q08. The latter saw NFA stocks markedly below required buffers for only 4 months in late 2013/early 2014.

Will the country see a repeat of either of these episodes? As strange as it sounds, the answer depends on the President. With rice prices starting to inch up recently and import lags of anywhere from one to four months, a decision to allow importation would help allay fears of impending shortages that could lead to higher price increases in anticipation of the demand/supply gap.

To avoid delays in light of the internal NFA disagreement and ensure that a decision to import is quickly carried out, the President might as well decide also whether NFA itself should import or allow private traders to do it.

But that is not the end of it.

By July this year, WTO rules require the current QR on rice to be converted into tariffs. Economists are one is supporting this transition to free up the rice market, expected to have significant beneficial knock-on effects on food prices, wage rates, overall inflation, public finances not to mention the country’s competitiveness.

With the tariff-equivalent of the QR estimated at 40%, the oft-cited tariff rate to be put in place is 35% which appears to be a compromise rate to balance the interests of consumers and local producers. Other economists are advocating lower rates ranging from 10% to 30%.

From what we gather, this will not happen; at least not by July, nor perhaps anytime this year. Domestic law affords rice permanent protection under a QR regime which means that in order to “tariffy” rice, the law has to be amended by Congress.

And in another struggle, the President’s economic managers, who favor a tariff regime, are at odds with his Agriculture secretary, who favor a continuation of the QR regime. The former sent word to the WTO last month that the country will not extend the waiver on the QR and will instead impose tariffs, while the latter is reported to have informed the WTO lately that the conversion cannot be done due to the delay in amending the law.

Here again, we await the President’s decision. Hopefully, whispers we are hearing of a cordon sanitaire around the President and of economic managers being marginalized are nothing but political noise.

Romeo L. Bernardo is a board director of the Institute for Development and Econometric Analysis. He was undersecretary of Finance during Corazon Aquino and Fidel Ramos administrations.